Special Report

Bad Economists and Good Capitalists

Obama and his minions notwithstanding, we're again seeing the amazing resilience of American entrepreneurialism.

By 11.2.11

Send to Kindle

In the same essay that contains the famous "Broken Window" fallacy, French economist Frédéric Bastiat (1801-1850) cautioned us to consider "That which is seen, and that which is not seen." His words should be required reading for any politician, elected official, or government bureaucrat:

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause -- it is seen. The others unfold in succession -- they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference -- the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come -- at the risk of a small present evil.

Needless to say, those economists who advised Barack Obama on the $787 billion (before interest) "stimulus" plan, "cash for clunkers," or his current raft of executive orders, as well as those like Robert Reich and Paul Krugman who prescribe more of the same snake oil, would fall into Bastiat's "bad economist" category.

The public is wiser than these bad economists as shown in part by the fact that the two biggest months of decline in the nation's unemployment rate in recent years occurred during November and December, 2010. This decline, 0.4 percent per month in back-to-back months, from 9.8 percent to a still-too-high nine percent unemployment rate followed directly upon Republicans taking control of the House of Representatives, blocking Barack "bad economist" Obama from ramming more of his anti-business agenda down the nation's throat. You have to go back to 1998 to find even one month of a 0.4% improvement in the unemployment rate, back to 1983 to find a single month with a larger improvement than that, and all the way to 1958 to find a larger two-month drop in unemployment.

Unemployment has ticked up very slightly from there -- after all, stopping bad policies is not the same as implementing good ones -- holding at 9.1 percent for the last three months, with October's data due this Friday (November 4) and a preview in the private ADP employment data on Wednesday. While unemployment is perhaps politically the most important economic statistic, it's certainly not the only one.

And most of the economic data in recent weeks has been fairly positive, at least positive compared to what we've been used to for the past three years. Consumer sentiment and spending are rebounding following August's stock market collapse (and the October sentiment data was collected before much of the recent market rally).

The most recent Gross Domestic Product (GDP) report -- for the third quarter, reported last Thursday -- came in at 2.5 percent year-over-year growth which, while nothing to write home about, was double the growth reported in the prior quarter. Furthermore, the "component mix" of the report was better than expected, with the result having been reduced by a greater than one percent decline in business inventories, implying more need for production in coming quarters. As good (if congenitally optimistic) economist Brian Wesbury wrote, "Business investment grew at a 16.3% rate in Q3, the fastest pace so far this year. In other words, consumer and business spending is growing much faster than those who watch consumer and business confidence data think it will, or should."

The October stock rally, despite a strong sell-off on Halloween day, left the Dow Jones Industrial Average with its third largest monthly percentage gain ever. While the gains were pushed along in large measure by hopes that Europe would find a way to deal with Greece's debt without causing the entire Euro currency structure to collapse, there's also a growing sense that America has dodged the dreaded "double-dip recession." (On Tuesday, the first day of November, the stock market plunged on news that the "done deal" with Greece may not be so done after all. It remains to be seen whether Greece can even remain in the Euro currency over the long term.)

To be sure, as Keith Diamond of Prudent Man Investment Management noted to me, "the market and the economy are not the same thing," and there can be a substantial disconnect between stock prices and employment when corporate profits are boosted through productivity gains -- often generated by firing people. As Diamond put it, "Corporations do not have a responsibility to employ people. They have a responsibility to be profitable." This is the real world that the Occupyers are so furiously clicking their heels together to escape.

But, to be more precise, it is the "large cap" world of companies with many employees that can increase productivity this way, and it is large companies that make up the major stock market averages. Small businesses on the other hand have fewer ways to grow without hiring people, explaining why more than 100 percent of net job growth during almost any period of modern American history comes from small business -- that's where true capitalism is. No bailouts, no friends in high places, no lobbyists. Just commitment and hard work guiding the invisible hand that increases the quality of life for all. The bailouts and stimulus are seen, even Solyndra is seen, but what is unseen today -- not least because the media has no interest in reporting on or even understanding what really drives the American economy -- is the resilience of American entrepreneurialism.

Again, none of the recent economic data would be remarkable in normal times, or perhaps it would be remarkable for its relative weakness during a point in an economic cycle that should be defined by rapid economic recovery. (More here.)

But these are not normal times, and the data is therefore remarkable for a different reason: the fact that we are growing at all, that there is anything other than outright pessimism among our companies and citizens, is a testament to the American entrepreneurial spirit -- and perhaps the best counter-argument to the Occupy Wall Street movement's uninformed hatred of all things capitalist.

It's as if America's businessmen took on -- before our Bad-Economist-In-Chief's spinmeisters conceived the phrase, and without His self-glorifying fanfare -- a "we can't wait" attitude toward building and running their businesses. Obama says "we can't wait" for Republicans to enact his policies; businessmen say we can't wait for government, period.

America's entrepreneurs are like triathletes swimming against an unexpectedly heavy current, going a few hundred yards in the time it would normally take to swim a mile -- a few hundred yards that the average person would not even attempt to cover. That current -- a relentless, mindless force opposing their every move -- is the "bad economist" administration we suffer under now.

Informed by a "spread the wealth around" mentality, willing (or more precisely eager) to pass some of the most significant legislation in the nation's history without first allowing members of Congress to read it, supportive of anti-capitalists (and anti-Semites) from Zuccotti Park to Zapatero, and in a regulation-promulgating frenzy, Obama's minions are creating an anti-business current against which only the strongest could hope to make the slightest progress.

(For another stunning example of President Obama repeating economic nonsense that Bastiat debunked so long ago, see section 8 of Bastiat's essay, entitled "Machinery," while remembering Barack Obama's suggestion that ATM machines -- and by extension most technological advancement -- cause high unemployment.)

A recent must-read report by UBS, entitled "Great Suppression II," says that business hiring "is being suppressed by regulations ranging from the familiar (healthcare reform, financial reform) to the obscure (MACT, CSAPR)" and posits that "Arguably the biggest impediment to hiring (particularly hiring of less skilled workers) is healthcare reform, which has the added drawback of straining state and Federal budgets."

Other government policies named by UBS as damaging to employment growth include tougher regulation of fossil fuels; financial reform regulations; our high corporate tax rate; new rules for electric boilers; immigration policy, and the NLRB. In other words, all areas where the administration's many bad economists harm the economy by their blinkered focus on short-term outcomes -- and usually non-economic outcomes backed by radical environmentalists or big labor thugs at that -- without regard to or understanding of the long-run damage they create.

And yet consumers are not depressed and businesses, while not aggressively hiring, are holding their own against the most ferocious anti-business current this nation has seen since FDR turned a bad recession into the Great Depression.

Our federal government is being run by perfect examples of what Bastiat warned us against more than a century and a half ago: "bad economists" with no ability to foresee longer-run impacts of policy. Indeed Obama's crew is so bad that they don't even correctly understand or predict the short-run impacts of incinerating a trillion dollars of taxpayer money. With econo-morons named Obama, Sebelius, Jackson, Salazar, and Chu holding the levers of power, what is stunning about the American economy, even about unemployment over 9 percent, is not that the numbers are bad, but that they're not much worse.

For that, we have true American capitalists -- unsung heroes numbering in the tens or hundreds of thousands -- to thank. No triathlete has ever more valiantly opposed a mindless tide than those American small businessmen opposing the "Great Suppression" of Barack Obama and his cadre of bad economists.

Allow me to close as Bastiat did, quoting from the posthumous memoirs of Chateaubriand who died two years before Bastiat:

There are two consequences in history; an immediate one, which is instantly recognized, and one in the distance, which is not at first perceived. These consequences often contradict each other; the former are the results of our own limited wisdom, the latter, those of that wisdom which endures. The providential event appears after the human event. God rises up behind men. Deny, if you will, the supreme counsel; disown its action; dispute about words; designate, by the term, force of circumstances, or reason, what the vulgar call Providence; but look to the end of an accomplished fact, and you will see that it has always produced the contrary of what was expected from it, if it was not established at first upon morality and justice.

Like this Article

Print this Article

Print Article
About the Author
Ross Kaminsky is a self-employed trader and investor and is a senior fellow of the Heartland Institute. He is the host of The Ross Kaminsky Show on Denver's NewsRadio 850 KOA on Saturday mornings from 6 AM to 9 AM. You can reach Ross by e-mail at rossputin(at)rossputin(dot)com.